Google Would Be Nuts To Buy Groupon, Even At A Huge Discount

Dec. 11 (Bloomberg) -- Even at half the price Google Inc. bid two years ago, Groupon Inc. is no deal for potential buyers.

After sinking 79 percent this year, the online-coupon service is now valued at $2.8 billion and last month fetched a record low price-sales ratio, according to data compiled by Bloomberg. As competition intensifies and demand wanes, analysts see revenue growth slowing to 0.6 percent in 2015, down from 45 percent in 2012 and the 1,233 percent average in the past two years, the data show.

Instead of selling to Google for $6 billion in 2010, Chicago-based Groupon chose to go public last year. While the shares surged 23 percent on Dec. 7 amid speculation Google might still be interested, a bid isn't likely given Groupon's slowdown and because Google may find it cheaper to invest more resources in its own coupon business, B. Riley & Co. said. Groupon is diversifying income away from just coupons with Groupon Goods, an online store for discounted products. To Benchmark Co., that may deter possible buyers such as Facebook Inc. and Microsoft Corp. that haven't traditionally run retail operations.

"For somebody to buy it, you have to figure out what you are really paying for," Sameet Sinha, a San Francisco-based analyst at B. Riley, said in a telephone interview. "Their existing customers are buying less and less. They have no technology really to talk about. Their sales force is declining. Frankly, what are you buying it for?"

Evaluating CEO

Julie Mossler, a spokeswoman for Groupon, declined to comment on the company's takeover prospects.

The company got its start in 2008 by selling coupons, known as Groupons, from businesses such as restaurants and nail salons. Groupon then shares the revenue with the merchant. Andrew Mason, the chief executive officer and co-founder, is trying to resurrect growth with the year-old Groupon Goods business, an e-commerce site where clients such as Dell Inc. and Garmin Ltd. sell marked-down products.

Mason's role as CEO was considered last week at a board meeting, according to a person familiar with the matter who asked to not be identified because the issue is private. After the gathering, Paul Taaffe, a company spokesman, said Mason would keep his job.

Groupon walked away from Google's takeover offer in December 2010, a person familiar with the matter said at the time. The bid valued Groupon at $6 billion, including incentives that would have been paid to Groupon's managers if performance targets were reached, people who asked to not be identified had said. Groupon ended up conducting an initial public offering and was valued at $16.7 billion following the first day of trading in November 2011, data compiled by Bloomberg show.

Accounting, Competition

After initially winning a market capitalization exceeding Google's offer, Groupon's stock has lost 79 percent since its debut amid accounting missteps, more competition and growth that failed to meet expectations. The shares fell to a price-sales ratio of 0.7 on Nov. 13, a record low, according to data compiled by Bloomberg.

On March 30, it reported a "material weakness" in its financial controls, forcing the company to reduce fourth-quarter revenue by $14.3 million. That followed the restatement of 2010 results six months earlier.

After revenue increased fivefold to $1.6 billion in 2011, Groupon's growth is slowing as the allure of daily-deal websites wears off among consumers and competition intensifies, according to Edward Woo, an Irvine, California-based analyst for Ascendiant Capital Markets LLC.

'Consumer Fatigue'

"Groupon didn't have any significant barriers to entry," Woo said in a phone interview. "When it first introduced this product, it got tremendous growth because a lot of people had never heard of it and wanted to use it. It was very novel. But now there's a bit of consumer fatigue."

LivingSocial Inc. is among the rival sites. Its struggle with slumping demand for online coupons forced Amazon.com Inc. to write down the value of its 29 percent stake this year, and prompted LivingSocial to say last month that it will eliminate about 400 of its 4,500 employees.

Analysts now project sales growth at Groupon will be 45 percent in the year ending this month, and growth will dwindle to just 0.6 percent in 2015, estimates compiled by Bloomberg show. To counter less demand for daily deals, Groupon introduced Groupon Goods, which sells everything from watches and bed frames to handbags and perfume at discounted prices. It competes against the likes of Amazon, the world's largest Internet retailer, as well as Gilt Groupe Inc. and Rue La La.

Limited Value

The company's direct sales -- comprised primarily of Groupon Goods -- rose 20-fold to $145 million in the quarter that ended Sept. 30, while revenue from the daily deals service declined 1.2 percent to $417 million.

"If they can show that they're a great online seller of products and can compete against the Amazons of the world, that would change a lot of investors' skepticism," Ascendiant Capital's Woo said. "In terms of the core daily deal business, there's not a lot of value there."

Groupon shares surged 23 percent on Dec. 7, the biggest rally since the company's first trading session. The advance was spurred by speculation that Mountain View, California-based Google may still be interested in the company, Telsey Advisory Group LLC's Tom Forte said last week.

"Where the stock is currently trading, it's a takeout candidate," the New York-based analyst said. "If Google was interested at $6 billion, I think it's a possibility."

Google Offers

On the other hand, Google already has tried building a competing product called Google Offers, started after the Groupon takeover failed, with limited success. While the company has $45.7 billion in cash and short-term investments that it could use to purchase Groupon, Google can probably spend more on its own coupon business and end up with something similar to its rival's service, said B. Riley's Sinha.

Could Google "get the same relationships without paying $3 billion for it? I think it could," Sinha said. "Why not, rather than have the legacy issues?"

Facebook, the owner of the world's biggest social network, has been moving into product sales to squeeze more revenue out of its more than 1 billion users. For that reason, it may find Groupon attractive, said Daniel Kurnos, an analyst for Benchmark in Delray Beach, Florida.

"Facebook has been trying to get into the e-commerce space, but without heavily deluging their users with ads," he said in a phone interview. "That's a way for them to maybe circumvent that issue."

Microsoft, Yahoo

Katelin Todhunter-Gerberg, a spokeswoman for Google, and Ashley Zandy, a spokeswoman for Menlo Park, California-based Facebook, declined to comment on whether they are interested in Groupon.

Microsoft or Yahoo! Inc. could also evaluate Groupon, seeking to improve the daily deals business by cutting costs and leveraging their own advertising relationships, Kurnos said. Still, Groupon Goods may be an obstacle because it would put any acquirer in the retail business, where those technology companies don't typically operate, he said.

Peter Wootton, a spokesman for Microsoft, declined to comment on whether the Redmond, Washington-based software maker is interested in Groupon. Sara Gorman of Sunnyvale, California- based Yahoo said the company doesn't comment on speculation.

"The Goods part of the business, I think, is sort of the question mark," Kurnos said. "Someone who buys this would have to take on the direct-to-retail portion of the business, and you'd need a company that has that exposure."